10 year growth, prime inner vs outer, APM data, Feb 99 - Feb 09.

I'd been thinking about what an investing colleague said about investing in the assets that provide the highest return (growth + yield) and decided to conduct some more research.

I'm looking to purchase my next IP and I'm trying to figure out where to buy.

I grabbed the Feb 09 copy of API (the latest issue I had) and compiled the following spreadsheet from some suburbs. I picked them almost purely at random (well I included areas I knew well and had property in). As you know I have property in a variety of locations and I did not 'cherry pick' the suburbs to prove a point. In fact, I prefer to live in the inner suburbs myself and am biased towards owning more inner property for this reason.

This is the last 10 years from Feb-Feb from APM. As you can imagine that's being extra kind to the upper end locations which have taken a fair hit between then and now.

Whilst I understand and agree with the high demand / capped supply theory for prime inner suburbs I just can't see the data support the claim that they have better growth. I think the demand is limited by affordability. One thing the data doesn't show is that some of those inner suburbs are really volatile, although that may be because of the wide variety of properties (in terms of price). These areas seem to mimic the stockmarket (and they probably are related as those who purchase in these areas have significant exposure to shares).

Interested in your thoughts. I'd like to do more research on this with different time periods. Obviously median values has it limitations however I think over a 10 year average across the range of suburbs is sufficient to tell me that there isn't really much in it between inner and outer suburbs.

If you know of any data that tells a different story I'd be very interested.

Does anyone know Residex's thoughts on inner vs outer?

David,

Your observations mirror mine.

Most people simply look at the inner suburbs and see that it has grown from say 500k to 650k in 5 years which represents a a 30% growth rate in a premium location. Note that due to the volatility the price of this property would have gone to 750k before dropping back down to 650K. Also rents would have increased from about 350pw to about 450pw about a 4.2% rents...still does not cover the mortgage.

As an example they don't see that in Melbourne they would have paid about 28K in acquistion costs (stamps, legals, etc.) plus they would have had about 50k worth of negative gearing holding costs post tax benefits. So based on this it as costed about 78k to hold. Assuming inflation is 4%...in 5 years you are actually going backwards in the premium property.

Lets use an example which is near and dear to me....lets use a example of a house bought for 140k in Werribee 5 years ago. This house is now worth about 220k...very little voltatility because 140k is now land value. This represents about a 50% gain. The holding costs is probably 10K and pruchase costs about 6K. The reason for low holding costs is because this house would be signifantly positively geared as rents would have been increased from 160pw to aobut 260pw in 5 years.

Even with inflation you are better off on the latter purchase.

This in my opinion is what separates investors from the amateurs...because most do not work at the cost of holding vs what they get back in capital gains.

DavidMc said:

This is the last 10 years from Feb-Feb from APM. As you can imagine that's being extra kind to the upper end locations which have taken a fair hit between then and now.

Whilst I understand and agree with the high demand / capped supply theory for prime inner suburbs I just can't see the data support the claim that they have better growth. I think the demand is limited by affordability. One thing the data doesn't show is that some of those inner suburbs are really volatile, although that may be because of the wide variety of properties (in terms of price). These areas seem to mimic the stockmarket (and they probably are related as those who purchase in these areas have significant exposure to shares).

Interested in your thoughts. I'd like to do more research on this with different time periods. Obviously median values has it limitations however I think over a 10 year average across the range of suburbs is sufficient to tell me that there isn't really much in it between inner and outer suburbs.

If you know of any data that tells a different story I'd be very interested.

Does anyone know Residex's thoughts on inner vs outer?

Click to expand...

DavidMc said:

Whilst I understand and agree with the high demand / capped supply theory for prime inner suburbs I just can't see the data support the claim that they have better growth. I think the demand is limited by affordability. ?

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Wouldn't it have to do a bit with timing? I'd imagine the inner city areas may have took off first when the boom cycle started in say 96/97, and much of their growth would be missed from the 10 year statistics?

You can only get so much from stats, and by adjusting the time frame you could make any sort of property win. As an example, take a 5 year time frame. As rural property was the last to go in the cycle, over a 5 year time period I'd bet rural resi may flog anything in the city, [eastern seaboard anyway] as most growth has happened in that period, but almost nothing happened from 96 to 03. That certainly doesn't mean rural resi has higher growth than city, as everyone knows it most certainly doesn't. But over a 5 year period it would possibly show that it has.

Take the period over 13 years and include the entire cycle to get a proper result.

DavidMc said:

One thing the data doesn't show is that some of those inner suburbs are really volatile, although that may be because of the wide variety of properties (in terms of price). These areas seem to mimic the stockmarket (and they probably are related as those who purchase in these areas have significant exposure to shares).
?

Click to expand...

Exposure to shares? What about exposure to business, which is directly related to shares?


See ya's.

there is a thead by harris busting the myth of inner>outer and he debated MY from what I can remember but I forgot what the final conclusion was though nor who the winner was

sash said:

As an example they don't see that in Melbourne they would have paid about 28K in acquistion costs (stamps, legals, etc.) plus they would have had about 50k worth of negative gearing holding costs post tax benefits. So based on this it as costed about 78k to hold. Assuming inflation is 4%...in 5 years you are actually going backwards in the premium property.

Click to expand...

Tell me about it...

Toorak Unit bought through Wakelins
April 2007 - Paid $592k at auction. Borrowed 100% + costs, $31k Stamp Duty + $16k LMI = total borrowed $639k.
Feb 2008 - Valued by NAB at $675k! (woohoo!)
April 2008 - Negative cashflow of $20k for the last year capitalised, total loan now $659k
April 2009 - Negative cashflow of $20k for the last year capitalised, total loan now $679k
May 2009 - Unit 1 sold in complex of 7 for $490k (doh!). Private sale, on the market for a year.

Unit sold - ground floor, renovated, good car park, no natural light.
My unit - top floor (of 4), balcony, city views, natural light, unrenovated, poor undersized car park. Both units have same floor plan.

It's really hard to tell, but I'd say my unit is perhaps 20% 'nicer' than the one that sold. So if unit 1's value is $490k I'd say that would put mine at around the $600 mark.

Based on this I'm $80k in negative equity on this property after two years.

I know in 10-15 years time things will be much better but as of today it's been a pretty rough start for the 'prime inner property with consistent strong growth, perpetual demand, restricted supply'.

Good thing I valued the place in Feb 2008 and have established lending facilities against this high valuation

Ouch David!

At the current rate of capitalisation of the loan in ten years the total loan on your unit will have about 950k owing. Assuming that it is worth $1.2m.

That is about $250k in profit again the orginal price of $650k....factor in in inflation at aobut 4%....and you have gone backwards by about $50-100k!

DavidMc said:

Tell me about it...

Toorak Unit bought through Wakelins
April 2007 - Paid $592k at auction. Borrowed 100% + costs, $31k Stamp Duty + $16k LMI = total borrowed $639k.
Feb 2008 - Valued by NAB at $675k! (woohoo!)
April 2008 - Negative cashflow of $20k for the last year capitalised, total loan now $659k
April 2009 - Negative cashflow of $20k for the last year capitalised, total loan now $679k
May 2009 - Unit 1 sold in complex of 7 for $490k (doh!). Private sale, on the market for a year.

Unit sold - ground floor, renovated, good car park, no natural light.
My unit - top floor (of 4), balcony, city views, natural light, unrenovated, poor undersized car park. Both units have same floor plan.

It's really hard to tell, but I'd say my unit is perhaps 20% 'nicer' than the one that sold. So if unit 1's value is $490k I'd say that would put mine at around the $600 mark.

Based on this I'm $80k in negative equity on this property after two years.

I know in 10-15 years time things will be much better but as of today it's been a pretty rough start for the 'prime inner property with consistent strong growth, perpetual demand, restricted supply'.

Good thing I valued the place in Feb 2008 and have established lending facilities against this high valuation

Click to expand...

topcropper said:

Wouldn't it have to do a bit with timing? I'd imagine the inner city areas may have took off first when the boom cycle started in say 96/97, and much of their growth would be missed from the 10 year statistics?

Click to expand...

Yes I would have liked to repeat this with more data but my API's from 2007 did not list a 10 year growth figure.

topcropper said:

You can only get so much from stats, and by adjusting the time frame you could make any sort of property win.

Click to expand...

I didn't want to make any type of property win. I just wanted to see for myself did any region significantly outperform the other. Based on what I saw from this very limited exercise my conclusion is that there isn't anything in it. No doubt different regions outperform others during different times frames but even when they do the difference is almost insignificant and no-one can pick it anyway.

It has been suggested to me that prime inner areas get to constantly enjoy at least a +2% growth benefit on top of the outer suburbs and that this effect compounding over 30 years equates to a massive difference in the end results so I should invest only in inner prime areas.

This exercise showed that for at least the last 10 years this was not the case and if you accept median prices (as imperfect as they are - equally imperfect to all regions mind you and spread over a long time) of having at least *some* value then surely this picture tells you that the statement above is not correct.

It also says to me that the examples of 10% growth + 4% yield versus 4% growth + 10% yield that can be found in some books and newsletters are very misleading as even the most crappiest bogan ridden junkie-villes with high crime and little amenity on the fringes of our metro areas usually get at least double that growth.

In fact I'd say using a median price more favours inner properties where I would imagine more renovation and re-development occurs. Can't ever remember a neighbour when I lived in the first home buyer area of Narre Warren spending $80k on a new kitchen and bathroom nor examples of tearing down an old $900k house on a big block and building 4 x $500k town houses. Sure it probably happened but not as often at a guess, although maybe I'm wrong.

What I actually believe to be the case, based on my research and my own experience as a Melbourne property investor for 8 years is that:
- neither region significantly nor consistently out performs another,
- different regions perform better depending on what time frame you look at (for example, in the 70's the middle burbs (Glen Waverley, etc) were all the rage and places like Richmond were the pits),
- once you factor in the yield and holding costs together with growth, middle and outer suburbs can be great performers and be a very valid choice in an investors portfolio.
- once you factor in high holding costs of the 'prime inner suburbs' you better hope you're on a high salary to handle their potential volatility.

topcropper said:

Take the period over 13 years and include the entire cycle to get a proper result.

Click to expand...

That would be great if I could. Or 15 or 20 years. Ideally a same house comparison with no improvements as well. If you know of any information source that lists those types of figures I'll do that. I don't.

sash said:

Ouch David!

At the current rate of capitalisation of the loan in ten years the total loan on your unit will have about 950k owing. Assuming that it is worth $1.2m.

That is about $250k in profit again the orginal price of $650k....factor in in inflation at aobut 4%....and you have gone backwards by about $50-100k!

Click to expand...

Well, it's not that bad. Negative cashflow is only $20k per year as I fixed at 7.30%. I'm due to come off in another year (was a 3 year). At my current rate of 4.84% would mean the negative cashflow would be $10k per year (fingers crossed!).

Plus the rent increases over time, but probably the main thing is I'm living in the property so I get to enjoy a nice place.

Still, not very spectacular! When I fast forward the scenario 20 years and assume a 10% growth rate things look much nicer. Even 7% or even 5% looks alright. Only needs a growth of a few % for me to be in the positive.

Actually, I worked it out.

See attached spreadsheet.

After 10 years of ownership (in 2017)
Loan $798,159,
Value $1,030,912,
Equity $232,753.

In 20 years (in 2027)
Loan $986,935
Value $2,027,959
Equity $1,041,024

Assumptions (in spreadsheet)
Long term interest rate - 7%
Tax rate - 30%
Growth rate - 7%
Rental growth - 4%

It's also worth mentioning for the above property I used zero of my own funds for acquisition or holding so naturally the return isn't as magnificent as if I put down 20%, but on the other hand, the IRR is infinite.

David - I agree with what you and Sash are saying.

I have a portfolio of "outer city" IPs only and have gotten used to people mocking at me and my investing ideas. Suffice to say that i am still accumulating IPs whereas those who went and bought in the inner city have exhausted all their funds/enthusiasm now for further acquisitions.

And this for me is the big thing, that is, by having better cash flow from the outer city IPs i have been able to buy more IPs constantly without hindering my lifestyle. And this has allowed me to control a much larger $ amount of IPs...

My 3 other IPs are all outer city (listed on that spreadsheet, Carrum Downs, Narre S and Berwick) have provided me with excellent growth averaging 11.7% over 8, 6 and 4 years, not a single year of negative growth AND together are now cashflow positive just a tad under $10k after tax.

I understand the theory and am prepared to believe in the prime inner theory but I just haven't seen the data to support it.

Hi David

All valid points and you're a man after my own heart- the old chestnut that only inner city properties outperform in terms of cg doesn't ring true in my camp either. I have three properties that could be classified as inner city (within 10km) and though they've performed well, they haven't necessarily outperformed my middle and outer ring suburb purchases (or regionals, for that matter!) plus, as you rightly point out, the holding costs and negative cashflow need to be accounted for, as they should in any property investment.

I've written several posts and contributed to media articles (including that API Feb 2009 copy you have!) regarding this and, over years of learning and experience in the market, have conducted my own research and actually changed my way of thinking about this. It's unfortunate, however, that property spruikers and those with a vested interest continue to spit out the old "Only buy inner city" mantra as though it were gospel- it's simply unvalidated and unable to be proved with hard data.

Key drivers for investors are affordability and rental returns and not all inner city areas provide these, especially cities like Sydney and Melbourne. This doesn't mean to say that we shouldn't invest in the inner ring suburbs, but don't make the mistake of thinking that such suburbs are necessarily going to out perform more affordable suburbs further out.

It appears then that the trick is to identify which area will perform best next. If you can do this then you can duplicate earlier.

If you can't do this (and I'd argue most of us can't), then I'm thinking it would make sense to go for the most low risk option. To me this would be the property with the best cashflow that has performed well (i.e. >10% growth over the last 10 years) and has shown stable growth (i.e. no years of negative returns).

I'm also thinking right now properties in the 400-500k+ price bracket present the best value and potential to grow, as the sub-400k market has been too hot with the FHB's.

Anything above 500k is just too poor a yield, so I'm going to shy away from that.

Now, I'm not one for buying a 450k property in a 350k suburb, so maybe I should look at areas where 450k represents a middle of the road property.

The other thing to consider is how many IPs I'd like to manage end game. Whilst I agree with Alex that 6 IPs is not twice the effort of 3 IPs I'd rather end up with say 7 than 10 all else being equal.

Jacque said:

plus, as you rightly point out, the holding costs and negative cashflow need to be accounted for, as they should in any property investment.

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Just as you were typing this I worked out the 20 year scenarios on my whole portfolio which takes into account yield.

After 20 years I will have up 18% and 20% better total return on two of my 40km Outer SE 280k-330k properties as I will in my one 600k Toorak property due to cashflow. One of my 3 outer IPs will be the same.

Now, the fact that it's worth twice as much, I paid so much more in buying costs (30k for stamps alone!) and have had my serviceability hampered so much (-20k pa) to me means that this is my poorest performer.

I have not taken into account depreciation which I suspect would see the newer outer properties rocket ahead in performance.

My depreciation schedules run for 20 years so I will be able to do this when I have them at home.

DavidMc said:

Just as you were typing this I worked out the 20 year scenarios on my whole portfolio which takes into account yield.

After 20 years I will have up 18% and 20% better total return on two of my 40km Outer SE 280k-330k properties as I will in my one 600k Toorak property due to cashflow. One of my 3 outer IPs will be the same.

Now, the fact that it's worth twice as much, I paid so much more in buying costs (30k for stamps alone!) and have had my serviceability hampered so much (-20k pa) to me means that this is my poorest performer.

I have not taken into account depreciation which I suspect would see the newer outer properties rocket ahead in performance.

My depreciation schedules run for 20 years so I will be able to do this when I have them at home.

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Well said David !

I have done all - inner, outer , regional

There is absolutely no doubt in my mind that :

1) Over a 5 , 7 or 10 year term, outer suburbs never lack behind inner on growth

2) If growth in % terms is similar, then outer universally will provide better yield

3) Better yield provides the investor the ability to hold more assets

4) Higher asset base (regardless of the location) fast-tracks the ability of an investor to gain wealth quickly.

Conclusion: Fast-tracking wealth acquisition depends on servicing an asset base (discount timing market). If that vehicle is residential property, buy outer!

Harris

(But do your own due diligence... Dont take my word for it )

Could not have said it better Harris.

Most people do not look at the fundamentals and only look at it from an emotional point of view.

I agree that portfolio size helps grow equity quickly also.

One point that people don't consider very often...particularly when you have a over 3 properties is to invest across the country to mitigate risk. So when you get no growth (as what happened in Sydney between 2004 and 2007) in one part of the country your portfolio still performs.

Accordingly my portfolio is now split between Sydney, Melbourne, Adelaide and Brisbane.

Harris said:

Well said David !

I have done all - inner, outer , regional

There is absolutely no doubt in my mind that :

1) Over a 5 , 7 or 10 year term, outer suburbs never lack behind inner on growth

2) If growth in % terms is similar, then outer universally will provide better yield

3) Better yield provides the investor the ability to hold more assets

4) Higher asset base (regardless of the location) fast-tracks the ability of an investor to gain wealth quickly.

Conclusion: Fast-tracking wealth acquisition depends on servicing an asset base (discount timing market). If that vehicle is residential property, buy outer!

Harris

(But do your own due diligence... Dont take my word for it )

Click to expand...

Folks, here is decade of Victorian median house price change/growth (Victorian Valuer-General Statistics), 1997-2007, ALSO has average of growth per annum for each town/city/metro suburbs area too, (for that decade anyway).

Also if you want, I have the figures (Vic Valuer-General) of 1994-2005. But they are just old chewed newspaper format, a snail mail job, if u want them PM me with an address to mail a copy.

1997-2007

http://www.news.com.au/heraldsun/files/median house prices by suburb.pdf

from Information Resources thread:

http://www.somersoft.com/forums/showthread.php?t=45620

This would be interesting - http://www.hotspotting.com.au/?act=viewProd&productId=54

hotspotting.com.au said:

Many investors believe the best places to buy are the iconic locations championed by the real estate industry: the inner-city suburbs, the sea change locations, the master-planned communities.


But research data contradicts this notion. For long-term capital growth, the best locations consistently are the cheaper areas of our capital cities and regional towns. The iconic locations of real estate are persistent under-achievers on capital growth, despite the rhetoric of real estate professionals.


If you’re a serious property investor, the Iconomics report is one of the most important documents you will read. It shows that the affordable suburbs and the inland country towns out-perform the “prime” suburbs and renowned beachside destinations on capital growth – over five years, 10 years and 15 years.

Click to expand...

David
I don't think that the Iconomics report will shed any light on what you have already come to realise.
I'm thinking the same way as you, so Please let me know on where you plan to buy next.
It's doing my head in trying to narrow it down.